For Profit Enterprise in Health Care: Can it Contribute to Health Reform?

American Journal of Law & Medicine, 36 (2010): 405-435 © 2010 American Society of Law, Medicine & Ethics

Boston University School of Law

For Profit Enterprise in Health Care:

Can it Contribute to Health Reform?

Eleanor D. Kinney†

I. INTRODUCTION

Since the demise of the last major health reform initiative in 1994, 1 health

coverage for the American people has deteriorated. Private insurance costs have risen, and coverage under private insurance became less comprehensive, with higher deductibles and copayments.2 Many new treatments for serious diseases and associated provider compensation have become more and more unaffordable, even for those with health insurance coverage.3 Recent reports document the challenges for cancer patients faced with the soaring cost of cancer treatment.4 Public programs, such as Medicare and Medicaid, have

† JD, MPH; Hall Render Professor of Law and Co-Director, Williams S. and Christine S.

Center for Law and Health, Indiana University School of Law – Indianapolis. JD, 1973, BA, 1969; Duke University, MPH 1979, University of North Carolina School of Public Health. The author wishes to thank Bobby Courtney and Tony Pearson for their work as research assistants on this article.

1 See, e.g., Jacob S. Hacker, The Road to Nowhere: The Genesis of President Clinton's Plan for Health Security (1997); Hugh Heclo, The Clinton Health Plan: Historical Perspective, 14(1) Health Aff. 87 (1995); Paul Starr, What Happened to Health Care Reform? Am. Prospect, Dec.1994; Adam Clymer, et al., For Health Care, Time was a Killer, N.Y. TIMES, Aug. 29, 1994, at Al; Adam Clymer, The Health Care Debate: The Overview, National Health Program, President’s Grandest Goal, Declared Dead in Congress, N.Y. Times, Sept. 27, 1994.

2 See Michael Chernew, et al., Increasing Health Insurance Costs and the Decline in Insurance Coverage, 40 HEALTH SERVICES RES. 1021, 1031 (2005); David M. Cutler, Employee Costs and the Decline in Health Insurance Coverage , 6 F. for Health Econ. & Pol’y 27, 28 (2003).

3 Kaiser Family Found., Health Care and the Middle Class: More Costs and Less Coverage 13 (2009), available at http://www.kff.org/healthreform/upload/7951.pdf.

4 Karyn Schwartz et al., Kaiser Family Found. &The American Cancer Soc’y, Spending to Survive:

Cancer Patients Confront Holes in the Health Insurance System (2009) [hereinafter SPENDING], available at http://www.kff.org/insurance/upload/7851.pdf.

406 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

picked up some slack and have grown in numbers.5 But gaps remain. Approximately 16 percent of the U.S. population is uninsured. 6 Annual U.S. spending for health care was $2 trillion in 2005, and is estimated to reach $4 trillion by 2015.7 Healthcare’s share of the economy has more than doubled over the past 35 years, rising from 7.2 percent of gross domestic product (GDP) in 1970 to 16 percent of GDP in 2005.8 The Centers for Medicare and Medicaid Services (CMS) estimates that national healthcare spending is expected to reach $4.5 trillion and comprise 19.3 percent of GDP by 2019.9

The elephant in the room when it comes to healthcare is its cost. This article analyzes how and why the cost of healthcare services grew in the way they did from the 1930s until today. This article proposes that the inflation in healthcare costs in the United States is due to both factors common to other countries and unique to the United States. The common factors are: (1) advances in medical science and associated technology and pharmaceutical products; and (2) the advent of widespread health insurance coverage. The factor unique to the United States is the large amount of for-profit enterprise in the healthcare sector. The United States is unique in the degree to which healthcare is produced, financed and delivered through for-profit enterprise.

This article analyzes the characteristics and behavior of the major players in the healthcare sector – physicians, hospitals, health insurers and medical product manufacturers – and assesses what characteristics and behavior might be undesirable in a publically-subsidized sector of the national economy. Resolving these issues becomes increasingly important as the nation moves toward health reform and mandated insurance coverage imposing involuntary financial obligations on patients, employees and employers.

II. THE HEALTH INSURANCE CRISIS

This section reviews the reasons for rising health care costs from the s1930s until today. This inflation results from two important factors: (1) the

5 Id. at 2. 6 Carmen DeNavas-Walt et al., Income, Poverty, and Health Insurance Coverage in the United States: 2007, at 19 (2008) [hereinafter

INCOME], available at http://www.census.gov/prod/2008pubs/p60-235.pdf . 7 Centers for Medicare and Medicaid Services, NHE Summary including Share

of GDP, CY 1960-2008, http://www.cms.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp#TopOfPage (last visited April 13, 2010) [hereinafter NHE Summary]; Centers for Medicare and Medicaid Services , NHE Historical and projections, 1965-2015, http://www.cms.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage (last visited Apr. 13, 2010) [hereinafter NHE Projections]. See also Kaiser Family Found., Snapshots: Health Care Costs, How Changes in Medical Technology Affect Health Care Costs (2007) [hereinafter Snapshots], available at http://www.kff.org/insurance/snapshot/chcm030807oth.cfm.

8 NHE Projections, supra note 7; NHE Summary, supra note 7. 9 Centers for Medicare and Medicaid Services, National Health Expenditure

Projections 2009-2019, at 1, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2009.pdf.

FOR PROFIT ENTERPRISE IN HEALTH CARE 407

advent of widespread health insurance coverage; and (2) advances in medical science and associated technology and pharmaceutical products.

A. Health Insurance in the United States

Health insurance is a Twentieth Century phenomenon. Early in the century, health insurance as it is known today did not exist. Only “sickness insurance” which paid for loss of income as a result of illness was available. 10 The American healthcare financing system took shape in the mid-Twentieth Century following World War II. Now in the Twenty-First Century, the health insurance system in the United States is crumbling under the weight of the tremendous and increasing cost of health insurance benefits.

Healthcare was not always unaffordable. In the early years of the Twentieth Century, the costs of medical care were lower and a manageable expense for most people. One analyst concluded that, in 1930, “[t]he people of the United States . . . are paying for the treatment of disease not less than $2,500,000,000 a year, or ($2,500,000,000÷ 120,000,000 population) $20.83 per capita, or approximately $100 per family.”11 Presented in Table 1 are the elements of costs included in this estimate. 12 One dollar in 1930 was worth $11.69 in 2005 dollars, according to the Consumer Price Index. 13 Thus, in 2005 dollars, healthcare expenses in 1930 were $1,169 per capita. Of note, in 2005, per capita healthcare expenditures in the United States were $6,701.14 How did costs sore from $ 2.5 billion in 1930 to $ 2 trillion in 2005 – a seventy-five year period?

10 See, e.g., Harry Alvin Millis, Sickness and Insurance: A Study of the Sickness

Problem and Health Insurance 28-29 (1937); John E. Murray, Origins of American Health Insurance: A History of Industrial Sickness Funds 6 ( 2007); National Industrial Conference Board, Sickness Insurance or Sickness Prevention, Research Report Number 6 (1918).

11 W.S. Rankin, The Economics of Medical Service, in The Socialization of Medicine

51-52 (Edith M. Phelps ed., 1930). 12 Id. 13 Measuring Worth, Seven Ways to Compute the Relative Value of a U.S. Dollar Amount,

1774 to Present, http://www.measuringworth.com/calculators/uscompare/result.php# (last visited Apr. 13, 2010).

14 NHE Summary, supra note 7.

408 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

1. Private Health Insurance

Throughout the 1920s and 1930s, healthcare services were becoming more expensive.15 A private initiative, the Committee on the Cost of Medical Care, examined the forces behind escalating costs with Dr. Ray Lyman Wilber, Secretary of the Interior, serving as chair.16 The Committee prepared numerous reports and provides the first systematic analysis of the American healthcare sector.

To address risks of undue financial exposure due to medical expenses, many hospitals, physicians and employers explored ways to finance patient healthcare expenses. During this period, various prepaid health plans were sprouting up across the United States. In 1939, the American Hospital Association adopted the Blue Cross symbol to identify plans meeting certain

15 Randall R. Bovbjerg et al., U.S. Healthcare Coverage and Costs: Historical Development

and Choices for the 1990's, 21 J.L. Med. & Ethics 141, 145 (1993). 16 The Committee on the Costs of Medical Care Presents Its Final Repor t, Milbank Mem’l

Fund Q. Bull. (The Milbank Memorial Fund), Jan., 1933, at 21-30; Herman M. Somers & Anne R. Somers, Doctors, Patients and Health Insurance: The Organization and Financing of Medical Care 137 (1961); Joseph S. Ross, The Committee on the Costs of Medical Care and the History of Health Insurance in the United States , 19 Einstein Q. J. Biology & Med. 129 (2002).

Table 1 The Cost of Medical Services for the Population of the

United States, c. 1930

150,000 physicians, @ $3,000 per annum $450,000,000

140,000 private duty nurses, @ $1,500 per annum

210,000,000

150,000 practical nurses, @ $1,000 per annum

150,000,000

100,000 attendants, @ $1,000 per annum

100,000,000

50,000 dentists, @ $3,000 per annum 150,000,000

7,000 hospitals, with a total of 860,000 beds 750,000,000

Druggists for medicines 700,000,000

25,000 healers, chiropractors, osteopaths, Christian Scientists, etc, @ $2,000 per annum

50,000,000

Grand Total

$2,560,000,000

Source: Rankin, supra note 11.

FOR PROFIT ENTERPRISE IN HEALTH CARE 409

criteria and standards, and franchised health plans as Blue Cross plans meeting these standards.17 In 1972, the Blue Cross Association separated from the American Hospital Association.

Another model of health plans that evolved in the 1930s and 1940s were panels of doctors. These types of plans were eventually called Blue Shield plans. Like Blue Cross plans, the Blue Shield plans formed their own association, and merged with the Blue Cross Association in 1982. 18

A third model of health plan evolved in which patients paid a fixed amount for care by an organization. The most famous of these is the Kaiser Permanente plan which evolved from industrial health programs for the workers of Kaiser Industries during the late 1930s and 1940s. 19 The Kaiser plan was later opened to the public in 1945. Other prepaid health plans, later dubbed health maintenance organizations (HMO), have been important models for containing healthcare costs.20

By 1940, 10 percent of the U.S. population had health insurance.21 By 1957, according to the Social Security Administration, 72 percent of the U.S. population had health insurance.22 During this period, the design of the American health insurance system solidified as a primarily private system through employers with essentially two service benefit plans – one for hospital and extended care facilities, and one for physicians and other providers of outpatient services. This design was based on the Blue Cross and Blue Shield plans which were the dominate private insurance plans of the day.23 Of interest, Congress later adopted this model for the Medicare program.

In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA).24 This act placed the regulation of employer-sponsored health insurance -- the predominant source of health insurance for the non-elderly -- with the federal government.25 Under the ERISA preemption provisions,26 employers who are self-insured and fund all the risk in their benefit plans are exempt from state insurance regulation. This division of regulatory authority

17 See Robert Cunningham, III & Robert M. Cunningham, Jr., The Blues: A History

of the Blue Cross and Blue Shield System (1997); Blue Cross Blue Shield Association, Blue Beginnings, http://www.bcbs.com/about/history/blue-beginnings.html (last visited April 13, 2010) (generally discussing the history of the BCBS symbol).

18 See Blue Cross Blue Shield Association, Birth of the Brands, http://www.bcbs.com/about/history/birth-of-the-brands.html (last visited Apr. 13, 2010).

19 Kaiser Permanente, News Center, Kaiser Permanente: More than 60 Years of Quality, http://xnet.kp.org/newscenter/aboutkp/historyofkp.html (last visited Apr. 13, 2010).

20 See Bradford H. Gray, The Rise and Decline of the HMO: A Chapter in U.S. Health-Policy History, in History and Health Policy in the United States 309-10 (Rosemary A. Stevens et al. eds., 2006).

21 Laura A. Scofea, The Development and Growth of Employer-Provided Health Insurance, 117 Monthly Lab. Rev. 3, 3-10 (1994).

22 Somers & Somers, supra note 16, at 11. 23 Sylvia Law, Blue Cross: What Went Wrong? (2d ed. 1976). 24 Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406, 88 Stat. 829

(codified as amended at 29 U.S.C. § 1001 (2006)). 25 Jana K. Strain & Eleanor D. Kinney, The Road Paved With Good Intentions: Problems

and Potential for Employer-Sponsored Health Insurance under ERISA, 31 Loy. U. Chi. L.J. 29, 29, 37 (1999).

26 29 U.S.C. § 1144 (2006).

410 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

over health plans has greatly inhibited state efforts to reform and expand health coverage.27

During the late 1970s as well as the 1980s, commercial insurance companies entered the health insurance market and targeted employers with healthier work forces.28 Blue Cross and Blue Shield plans operated as not-for-profit health service plans under state law and had legal obligations such as community rating and mandatory enrollment periods in which they had to accept all comers.29 Commercial insurers, on the other hand, were able to experience rate and engage in other underwriting practices that enabled them to insure the more desirable risks in terms of health.30

To compete, Blue Cross Blue Shield plans abandoned the not-for-profit service benefit plan model, and reorganized themselves as for-profit companies. Before 1986, organizations sponsoring Blue Cross Blue Shield plans were tax exempt under 501(c)(4) as social welfare plans.31 Congress revoked the exemption in the Tax Reform Act of 1986 for not-for-profit plans that sold insurance with underwriting characteristic of commercial insurers. in order to compete with commercial insurers.32 In 1994, the Blue Cross Blue Shield Association adopted a policy to permit plans to be for-profit corporations.33 Of note, the largest insurance company in the nation, Wellpoint, has many subsidiaries that are Blue Cross Blue Shield plans. 34

2. Public Health Insurance

In 1965, Congress enacted the Medicare and Medicaid programs.35 In 1972, Congress expanded Medicare coverage to the seriously disabled and to people with End Stage Renal Disease (ESRD).36 The Medicare program is a social insurance program financed with a combination of payroll taxes for hospital insurance and premiums from Medicare beneficiaries for physician and other outpatient services.37 Basic Medicare benefits include hospital and

27 Mary Ann Chirba-Martin & Troyen A. Brennan, The Critical Role of ERISA in State

Health Reform, 13(2) Health Aff. 142, 142 (1994). See also Wendy K. Mariner, Problems with Employer-Provider Health Insurance — The Employee Retirement Income Security Act and Health Care Reform, 327 New. Eng. J. Med. 1682 (1992) (pointing out problems with federal preemption and state health insurance regulations).

28Bovbjerg, supra note 15, at 154. 29Cunningham & Cunningham, supra note 17, at 131-74. 30Bovbjerg, supra note 15, at 152. 31 26 U.S.C. § 501(c)(4) (1982). 32 Tax Reform Act of 1986, Pub. L. No. 99-514, § 1012, 100 Stat. 2085. 33 IRS.gov, Coordinated Issue Paper - Blue Cross Blue Shield/Health Insurance; Life

Insurance (Effective Date: June 4, 2008), http://www.irs.gov/businesses/article/0,,id=183646,00.html (last visited Mar. 3, 2010).

34 Wellpoint.com, Family of Companies, http://www.wellpoint.com/business/about_family.asp (last visited Apr. 15, 2010).

35 Social Security Amendments of 1965, Pub. L. No. 89-97, 79 Stat. 286 (codified as amended at 42 U.S.C. 18 §§ 1395-1396 (2006)). See Judith M. Feder, Medicare: The Politics of Federal Hospital Insurance (1977); Theodore Marmor, The Politics of Medicare (1973); Robert J. Myers, Medicare (1970).

36 Social Security Amendments of 1972, Pub. L. No. 92-603, §§ 301, 299I, 86 Stat. 1329, 1463-65

(codified as amended at 42 U.S.C. § 1395c (2006)). 37 42 U.S.C. §§ 1395I (Part A) & 1395t (Part B) (2006).

FOR PROFIT ENTERPRISE IN HEALTH CARE 411

extended-care services,38 as well as physician and other outpatient services on a fee-for-service basis,39 or as part of a prepaid health plan.40 In 2003, Congress added a new, optional prescription-drug benefit to the Medicare program.41

Medicaid is a welfare program jointly financed and administered by the federal government and the states.42 Medicaid provides health insurance for some disabled and elderly poor, as well as poor mothers, infants, and children.43 The Medicaid program provides basic hospital, physician, and long-term care services to eligible individuals.44 In 1997, Congress enacted the State Children’s Health Insurance Program (S-CHIP), extending health coverage to all eligible children.45

The cost of the two programs greatly exceeded prior estimates. Immediately upon implementation, the Medicare program generated enormous demand for healthcare services, and thus created sharp and continuing increases in the cost of healthcare.46 Similarly, Medicaid expenditures rose at unexpected levels, putting great pressure on state budgets.47 The Medicare and Medicaid programs exacerbated the healthcare cost inflation that the United States had been experiencing since the 1920s.

In 1972, inspired by the experience of private HMOs such as Kaiser Permanente, existing from the 1930s, and responding to a major initiative of the Nixon administration,48 Congress passed the Federal HMO Act to promote the development of capitated healthcare delivery for the non-elderly population.49 Since the 1970s, both the Medicare and Medicaid programs have experimented with, and later embraced, prepaid managed care plans for their beneficiaries and recipients, respectively. 50

Congress enacted Part C of the Medicare Program to include the Medicare+Choice Program in 1997.51 The Medicare+Choice program did not

38 Id. §§ 1395c–1395i. 39 Id. §§ 1395j–k. 40 Id. § 1395w-21. 41 Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),

Pub. L. No. 108-173, § 101(a)(2), 17 Stat. 2066 (codified at 42 U.S.C. § 1395w-101 (2006)). 42 See 42 U.S.C. § 1396. 43 See Id. § 1396a(l) . 44 Id. § 1396a(1)-(9). 45 Id. § 1397aa. 46 Marian Gornick et al., Twenty Years of Medicare and Medicaid: Covered Populations,

Use of Benefits, and Program Expenditures, 6 Health Care Fin. Rev. 13, 35, 42 (Supp. 1985); See Reimbursement Guidelines for Medicare: Hearing Before the S. Comm. on Finance , 89th Cong. 2 (1966) (staff report entitled Proposed Medicare Reimbursement Formula).

47Stephen M. Davidson et al., Medicaid Myths: Trends in Medicaid Expenditures and the Prospects for Reform, 10 J. HEALTH POL. POL’Y. & LAW 699 (1986).

48 See Harold S. Luft, Assessing the Evidence on HMO Performance, 58 Milbank Memorial Fund Quarterly/Health and Society 501 (1980).

49 Health Maintenance Organization Act of 1973, Pub. L. No. 93-222, 87 Stat. 914 (codified as amended at 42 U.S.C. §§ 300(e) et seq. (2006)).

50 See Eleanor D. Kinney, Medicare Managed Care from the Beneficiary's Perspective, 26 SETON HALL L. REV. 1163, 1173-76 (1996).

51 Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat. 251, 4001(codified at scattered sections of 42 U.S.C. §§ 1391w-21, 1851 (2006)). See Medicare Program; Establishment of the Medicare Choice Program, 63 Fed. Reg. 34,968 (June 26, 1998) (to be codified at scattered sections of 42 C.F.R. pt. 400, 403, 410, 411, 417, 422).

412 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

compete well on costs to beneficiaries compared to fee-for-service Medicare,52 and thus was not particularly successful. The Medicare Prescription Drug Improvement and Modernization Act of 2003 changed the Medicare+Choice program to the Medicare-Advantage program, and provided additional funding to managed care plans.53

Medicaid has been moving to prepaid managed care, particularly for children and pregnant women, since 1981.54 In 1997, Congress authorized states to serve Medicaid beneficiaries through prepaid managed care plans without getting a waiver of program requirements.55 Since the 1990s, states have been allowed to use the waiver authority under section 1115 of the Social Security Act56 to expand coverage in prepaid managed care for low-income uninsureds.57

3. Implications of Rising Costs for Public and Private Health Insurance

The rising cost of healthcare expenditures has been problematic for both public and private insurance programs. For public programs, the inflation adds to government budget deficits and threatens economic growth. According to the Congressional Budget Office, under current law, federal spending on Medicare and Medicaid will increase from about 4 percent of GDP in 2009, to nearly 6 percent in 2019, and 12 percent by 2050. 58 These increases will be due primarily to growth in per capita costs rather than from the aging of the population.59

For private health insurance offered as an employee benefit, threats to actual access to coverage are posed. As costs rise, many employers impose greater cost-sharing on workers, making coverage unaffordable, or just drop employee health insurance coverage altogether.60 According to the Kaiser

52 Robert H. Miller & Harold S. Luft, HMO Plan Performance Update: An Analysis Of The

Literature, 1997–2001, 21(4) Health Aff. 63 (2002). 53 Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),

Pub. L. 108-173, § 201, 117 Stat. 2066 (codified as amended at 42 U.S.C. § 1395w-21 (2006)). See Robert A. Berenson & Brian E. Dowd, Medicare Advantage Plans At A Crossroads--Yet Again, 28(1) HEALTH AFF. w29, w32 (2008); Marsha Gold, Medicare's Private Plans: A Report Card on Medicare Advantage, 28(1) Health Aff. w41, w41-w54 (2009).

54 See Robert E. Hurley et al., Managed Care in Medicaid: Lessons for Policy and Program Design 111-13 (1993) (discussing managed care); Deborah A. Freund & Edward Neuschler, Overview of Medicaid Capitation and Case-Management Initiatives, Health Care Fin. Rev., 1986 Annual Supp., at 21, 21-22.

55 Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, § 2175, 95 Stat. 809 (codified as amended at 42 U.S.C. § 1396n(b)(1) (1994)). Balanced Budget Act of 1997, Pub. L. 105-33 § 4702 (to be codified at 42 U.S.C. § 1396u-2).

56 42 U.S.C. § 1315(a) (2006). 57 See John Holahan et al., Insuring The Poor Through Section 1115 Medicaid Waivers ,

14(1) Health Aff. 199, 200 (1995); Judith M. Rosenberg & David T. Zaring, Managing Medicaid Waivers: Section 1115 And State Health Care Reform, 32 HARV. J. ON LEGIS. 545, 555-56 (1995).

58 Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals ix (2008), available at http://www.cbo.gov/ftpdocs/99xx/doc9924/12-18-KeyIssues.pdf.

59 Id. 60 Sara R. Collins et al., The Commonwealth Fund, Losing Ground: How the Loss

of Adequate Health Insurance Is Burdening Working Families—Findings from the Commonwealth Fund Biennial Health Insurance Surveys, 2001–2007 (2008), available at http://www.commonwealthfund.org/Content/Publications/Fund-

FOR PROFIT ENTERPRISE IN HEALTH CARE 413

Family Foundation, premiums for employer-based health insurance rose by 5 percent in 2008, with greater increases for smaller employers.61 Further, since 1999, premiums for employer-sponsored health coverage increased 120 percent.62 The Kaiser Family Foundation reports that health insurance expenses are “the fastest growing cost component for employers” and are likely to “overtake profits by the end of 2008.”63 The decline in the scope and generosity of employer-sponsored coverage is stunning as described by researchers Jonathan Gruber and Robin McKnight:

But the past two decades have been a period of substantial reduction in both the scope and generosity of employer-provided health insurance. In 1982, roughly 80% of workers were covered by employer-provided health insurance. By 1998, this had fallen to 73%. Similarly, in 1982, 44% of those who were covered by their employer-provided health insurance had insurance that was fully financed by their employer. But by 1998, this had fallen to 28%.64

The situation has deteriorated further. The United States Census reports that the number of the percentage of the population covered by employer-sponsored private health insurance is 59.3 percent in 2007.65

Many persons are increasingly vulnerable to financial ruin if they get sick. It is not just over the15 percent of the U.S. population that is uninsured. 66 Many insured persons find their insurance is inadequate to cover major medical expenditures. 67 A recent poll sponsored by the Kaiser Family Foundation and the Gallup Poll found that 21 percent of American families reported difficulty in paying medical bills.68 Also, in recent years, the number of consumer bankruptcies associated with medical debt has soured accounting for about 50 percent of consumer bankruptcies.69 Medical debt also contributes to mortgage defaults and home foreclosures.70

The case of cancer care is a dramatic example of the challenges to the institutions of public and private health insurance coverage. With advances in

Reports/2008/Aug/Losing-Ground--How-the-Loss-of-Adequate-Health-Insurance-Is-Burdening-Working-Families--8212-Finding.aspx#citation.

61 Kaiser Family Found. & Health Research Educ. Trust, Employee Health Benefits: 2008 Annual Survey 1 (2008) [hereinafter Employee Health Benefits], available at http://ehbs.kff.org/. See also National Coalition on Health Care, Health Care Facts: CostS (2009), available at http://nchc.org/facts-resources/fact-sheet-cost.

62 Employee Health Benefits, supra note 61. 63 Id. 64 Jonathan Gruber & Robin McKnight, Why did Employee Health Insurance

Contributions Rise? 22 J. Health Econ. 1085, 1085 (2003). 65 Carmen DeNavas-Walt et al., U.S. Census Bureau Income, Poverty, and Health

Insurance Coverage in the United States: 2007, 19 (2008), available at http://www.census.gov/prod/2008pubs/p60-235.pdf .

66 Id. 67 Collins, supra note 60. 68 Kaiser Daily Health Policy Report, Coverage & Access: 21% of U.S. Residents

Report Trouble Paying Medical, Drug Bills in 2008, Poll Finds (2009), available at http://www.kaisernetwork.org/daily_reports/rep_index.cfm?DR_ID=57425.

69 David U. Himmelstein et al., Illness And Injury As Contributors To Bankruptcy , 24(1) Health Aff. w5 (2005).

70 Christopher T. Robertson et al., Get Sick, Get Out: The Medical Causes of Home Mortgage Foreclosures, 18 Health Matrix 65 (2008).

414 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

chemotherapy and, more recently, biotechnology, newer, better, but much more expensive cancer treatments are coming to market.71 The newer, more effective treatments often cost thousands of dollars per dose. 72 Now the cost of treating cancer constitutes 5 percent of all medical expenditures. 73

More and more cancer patients report problems with paying for cancer treatment even though many are insured, and many go bankrupt even though they have insurance.74 Between 2003 and 2006, the percentage increase of costs of cancer care paid by health plans was 54 percent, and the percentage increase in payments by patients was 109 percent.75 According to the American Cancer Society, one in five people with health insurance diagnosed with cancer will use all or most of their savings fighting cancer.76 The ACS also reports that cancer patients with no or not enough health insurance “have higher medical costs, poorer outcomes, and higher rates of death.”77

B. The Evolution of the Health Insurance Benefit Package

The content of the benefit packages for health insurers has dramatically changed in recent years. This change has been an important reason for the rising cost of health insurance coverage.

1. Advances in Medical Technology and Pharmaceutical Products

The most significant reason for the growth in healthcare costs has been the development of effective medical treatments. Early in the Twentieth Century there were few and more primitive treatments for illnesses. The 1910 Flexner Report on medical education, which called for academic training for physicians in clinical settings, established the scientific basis of medicine in the United States and Canada.78 In the 1930s, the federal government established the National Institutes of Health (NIH) to promote and support biomedical research. By the 1950s, there were multiple academic medical centers in the United States which had a great influence on the future course of American medicine. By the end of the century, there had been significant

71 See American Cancer Society, Cost of Cancer,

http://www.cancer.org/docroot/MIT/content/MIT_3_2X_Costs_of_Cancer.asp (last visited Apr. 2010); Cost of Cancer On the Rise, Newer Chemotherapy Treatments Lead Soaring Drug Prices, Am. Cancer Soc’y, Apr. 19, 2002, http://www.cancer.org/docroot/NWS/content/NWS_1_1x_Cost_of_Cancer_On_the_Rise.asp

72 Gina Kolata & Andrew Pollack, The Evidence Gap: Costly Cancer Drug Offers Hope, but Also a Dilemma, N.Y. Times, July 6, 2008, available at http://www.nytimes.com/2008/07/06/health/06avastin.html.

73 The High Concentration of US Health Expenditures, Research in Action (Agency for Healthcare Research and Quality), June 2006, at 2, available at http://www.ahrq.gov/research/ria19/expendria.pdf.

74 Schwartz, supra note 4. 75 Liz Szabo, Study: Many Cancer Patients Forgoing Care Because of Cost, USA TODAY,

Oct. 13, 2008, at D5, available at http://www.usatoday.com/news/health/2008-10-12-cancer-costs_n.htm.

76 American Cancer Society, Cancer Facts & Figures 2008 , at 38 (2008) available at http://www.cancer.org/downloads/STT/2008CAFFfinalsecured.pdf.

77 Id. 78 Abraham Flexner, Medical Education in the United States and Canada: A

Report to the Carnegie Foundation for the Advancement of Teaching (1910) .

FOR PROFIT ENTERPRISE IN HEALTH CARE 415

advances in medical services and products, making old scourges past memories and getting a handle on diseases for which there had been no cure.

In the early years of the Twentieth Century, surgery became widespread with advances in antisepsis and anesthesia.80 In combating infectious disease, Drs. Florey and Fleming discovered penicillin in the 1930s.81 Chronic diseases have proven to be a more difficult challenge. Banting and Best discovered insulin as a treatment for diabetes in the 1920s.82

During the 1940s and 1950s, there were great advances in the understanding and treatment of chronic diseases affecting millions of Americans. In 1948, researchers at Boston University launched the Framingham Heart Study to identify the common factors that contribute to cardiovascular disease by following several generations of subjects living in Framingham, Massachusetts since 1948.83 The Framingham Study and other

79 Id. 80 William J. Bishop, The Early History of Surgery (1960). 81 Eric Lax, The Mold in Dr. Florey’s Coat: The Story of the Penicillin Miracle

(2004). 82 Michael Bliss, The Discovery of Insulin 11-12 (1984) 83 Framingham Heart Study: A Joint Project of the National Heart, Lung and Blood

Institute and Boston University, http://www.framinghamheartstudy.org/ (last visited Apr. 10, 2010). See Thomas R. Dawber et al., Epidemiological Approaches to Heart Disease: The Framingham Study, 43 AM. J. PUB. HEALTH 279 (1951).

Figure 1_ The Impact of Medical Technology Advances on Clinical

Cardiac Care “Heart disease and its consequence, heart attack, is the leading cause of death in the U.S. and a good example of how new technology has changed the treatment and prevention of a disease over time. In the 1970s, cardiac care units were introduced, lidocaine was used to manage irregular heartbeat, beta-blockers were used to lower blood pressure in the first 3 hours after a heart attack, “clot buster” drugs began to be widely used, and coronary artery bypass surgery became more prevalent. In the 1980s, blood-thinning agents were used after a heart attack to prevent reoccurrences, beta-blocker therapy evolved from short-term therapy immediately after a heart attack to maintenance therapy, and angioplasty (minimally invasive surgery) was used after heart attack patients were stable. In the 1990s, more effective drugs were introduced to inhibit clot formation, angioplasty was used for treatment and revascularization along with stents to keep blood vessels open, cardiac rehabilitation programs were implemented sooner, and implantable cardiac defibrillators were used in certain patients with irregular heartbeats. In the 2000s, better tests became available to diagnose heart attack, drug-eluting stents were used, and new drug strategies were developed (aspirin, ACE inhibitors, beta-blockers, statins) for long-term management of heart attack and potential heart attack patients. From 1980-2000, the overall mortality rate from heart attack fell by almost half, from 345.2 to 186.0 per 100,000 persons. (citation omitted)”79

416 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

medical research explored the factors contributing to cardiovascular disease. In the 1960s, a Veterans Administration cooperative trial examined the impact of hypertension on heart disease and stroke, providing additional insight into the causes, prevention and treatment of cardiovascular disease.84 These developments radically changed the treatments that were available for the care of patients with coronary artery disease. At Figure 1 is a description of the changes in the care of coronary artery disease.85 Similar evolution occurred in other fields as well.

In the early 1950s, Drs. Watson and Crick discovered DNA and the double helix, which was the key to unlocking the human genome.86 Following breakthroughs in basic sciences and genetics in the 1950s, the years following witnessed dramatic discoveries in the understanding of major biological processes, that fostered a revolution in the diagnosing and treatment of disease.87 New fields of medicine open daily with advances that transform death sentences into diseases with annoying discomforts.88 Associated with these developments has been tremendous progress in the development of pharmaceutical and medical device products.89

Perhaps the advances in cancer treatment are the most outstanding. At mid-century, cancer was incurable. Indeed, there were few resources devoted to the diagnosis and treatment of cancer in the early part of the Twentieth Century.90 The first chemotherapy treatment for cancer was discovered during World War II.91 Cancer treatment, largely ineffective until well into the 1960s,92 has since witnessed tremendous advances.93

84 National Library of Medicine, The Edward D. Freis Papers: The VA Cooperative Study

and the Beginning of Routine Hypertension Screening, 1964-1980, http://profiles.nlm.nih.gov/XF/Views/Exhibit/narrative/study.html (last visited Apr. 14, 2010).

85 Snapshots, supra note 7. 86 See James D. Watson, The Double Helix: A Personal Account of the Discovery

of the Structure of DNA (2001). 87 See, e.g., Robert E. Adler, Medical Firsts: From Hippocrates to the Human

Genome (2004); John G. Simmons, Doctors and Discoveries: Lives that Created Today's Medicine (2002).

88 See William B. Schwartz, In the Pipeline: A Wave of Valuable Medical Technology , 13(3) Health Aff. 70 (1994). See generally Kant Patel & Mark E. Rushefsky, Health Care Policy in an Age of New Technologies (2002).

89 See, e.g., Progress in Drug Research (Ernst Jucker ed., 2002). See also FDA Regulatory Affairs: A Guide for Prescription Drugs, Medical Devices, and Biologics (Douglas J. Pisano & David S. Mantus eds., 2008); Elaine Whitmore, Development of FDA-regulated medical products: prescription drugs, biologics and Medical Devices (2004).

90 See Bernhard J. Stern, The Commonwealth Fund, Medical Services by Government: Local, State, and FederaL 53-54 (1946).

91 See Sidney Farber et al., Temporary Remissions in Acute Leukemia in Children Produced by Folic Antagonist, 4-Aminopteroylglutamic Acid (Aminopterin), 238 New Eng. J. Med. 787 (1948).

92 See Rose J. Papac, Origins of Cancer Therapy, 74 Yale J. Biol. Med. 391, 391, 394 (2001).

93See Benjamin Djulbegovic, et al., Treatment Success in Cancer New Cancer Treatment Successes Identified in Phase 3 Randomized Controlled Trials Conducted by the National Cancer Institute–Sponsored Cooperative Oncology Groups, 1955 to 2006, 168 Archives Internal Med. 632 (2008).

FOR PROFIT ENTERPRISE IN HEALTH CARE 417

2. The Impact of Changing Medical Benefits on the Cost of Health Insurance

All of these advances cost money. The impact has been dramatic. At

Figure 2 is presented Rettig’s “Mechanisms of Action” indicating how new medical technology affects the cost of medical care.94

Clearly the changing content of medical benefits has come at a high cost. However, estimating the amount of the rise in healthcare expenditures has proven illusive due to the size of the healthcare sector and the huge variety of items and services that constitute the sources of health expenditures. 95

Since the mid-Twentieth Century, there has been much scholarship and research identifying the components of health sector costs.96 Extensive health services research has demonstrated that physicians and other providers have

94 Richard A. Rettig, Medical Innovation Duels Cost Containment, 8(3) Health Aff. 7, 15

(1994). 95 Joseph P. Newhouse, Medical Care Costs: How Much Welfare Loss? 6(3) J. Econ.

Persp. 3 (1992). See also SnapshotS, supra note 7 (citing Newhouse). 96 See, e.g., Kaiser Family Foundation, U.S. Health Care Costs: Background Brief,

http://www.kaiseredu.org/topics_im.asp?imID=1&parentID=61&id=358 (last visited Apr. 13, 2010); Thomas Bodenheimer, High and Rising Health Care Costs. Part 1: Seeking an Explanation, 142 Annals Internal Med. 847 (2005) (The first in a series of four articles on health care costs); Peter R. Orszag & Philip Ellis, The Challenge of Rising Health Care Costs — A View from the Congressional Budget Office, 357 New Eng. J. Med. 1793 (2007).

Figure 2 Rettig’s “Mechanisms of Action:” How New

Medical Technology Affects Health Care Costs

Development of new treatments for previously untreatable terminal conditions, including long-term maintenance therapy for treatment of such diseases as diabetes, end-stage renal disease, and AIDS;

Major advances in clinical ability to treat previously untreatable acute conditions, such as coronary artery bypass graft;

Development of new procedures for discovering and treating secondary diseases within a disease, such as erythropoietin to treat anemia in dialysis patients;

Expansion of the indications for a treatment over time, increasing the patient population to which the treatment is applied;

On-going, incremental improvements in existing capabilities, which may improve quality;

Clinical progress, through major advances or by the cumulative effect of incremental improvements, that extends the scope of medicine to conditions once regarded as beyond its boundaries, such as mental illness and substance abuse.

418 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

tended to provide more healthcare than necessary to maximize reimbursement for services.97 Some interesting work by Robert Brooke and colleagues,98 as well as David Eddy and colleagues,99 demonstrated that not all costly medical procedures are more effective than less costly care, and called for more research to evaluate the outcomes of healthcare procedures.

An important observation about the practice of medicine is the great, unexplained variation in services provided for the same conditions. Dr. John Wennberg’s important work has long demonstrated this reality. 100 Dr. Wennberg and colleagues have established the Dartmouth Atlas Project, which uses Medicare data to analyze national, regional, and local markets, as well as individual hospitals and affiliated physicians. 101 This project has documented great variations in how medical resources are distributed and used in the United States.

A recent and influential report by Pricewaterhouse Coopers reported that “wasteful spending constitutes $1.2 trillion of the $2.2 trillion spent on health care.102 The wasteful spending is due to behavioral practices of patients such as obesity, overuse and misuse of procedures and other quality problems, and administrative and businesses processes that add costs without adding value.

Finally, it is noteworthy that the per capita cost for healthcare in the United States greatly exceeds all other countries in the world.103 Analysts have suggested that the difference results from the fact that the price of healthcare services in the United States is higher.104 Important questions are whether for-profit enterprise explains this price difference, and, if so, does for-profit enterprise contribute value to the American patient and the economy of the United States?

97 See, e.g., Kenneth J. Arrow, Uncertainty and the Welfare Economics of Medical Care, 53 AM. ECON. REV. 941 (1963); Martin S. Feldstein, Hospital Cost Inflation: A Study of

Nonprofit Price Dynamics, 61(5) AM. ECON. REV. 853 (1971). See also Health Care and its Costs: Can the U.S. Afford Adequate Health Care? (Carl J. Schramm ed., 1987); A New Approach to the Economics of Health Care (Mancur Olsen ed., 1981).

98 See, e.g., Robert H. Brook et al., Quality of Medical Care Assessment Using Outcome Measures: An Overview of the Method (1976); Robert H. Brook & Kathleen N. Lohr, Efficacy, Effectiveness, Variations, and Quality: Boundary-Crossing Research, 23 MED. CARE 710 (1985).

99 David M. Eddy & John Billings, The Quality of Medical Evidence: Implications for Quality of Care, 7(1) Health Aff. 19 (1988), available at http://healthaff.highwire.org/cgi/reprint/7/1/19.pdf; David M. Eddy, Variation in Physician Practice: The Role of Uncertainty, 3(2) Health Aff. 74 (1984).

100 See John E. Wennberg & John Gittelsohn, Small Area Variation in Health Care Delivery, 182 SCIENCE 1102-08 (1973); John E. Wennberg & John Gittelsohn, Variations in Medical Care Among Small Areas, 246 Scien. Am. 120 (1982); John E. Wennberg et al., Professional Uncertainty and the Problem of Supplier-Induced Demand. 16 Soc. Sci. & Med. 811 (1982).

101 The Dartmouth Atlas of Health Care, http://www.dartmouthatlas.org/index.shtm (last visited Apr. 14, 2010).

102 Pricewaterhouse Coopers, The Price of Excess: Identifying Waste in Healthcare Spending 2008, http://www.pwc.com/us/en/healthcare/publications/the-price-of-excess.jhtml (last visited Apr. 14, 2010).

103 See WHO, World Health Statistics 2006, available at http://www.who.int/entity/whois/whostat2006_healthsystems.pdf (last visited Mar. 23, 2008).

104 See Gerald F. Anderson et al., Health Spending in the United States and The Rest of the Industrialized World, 24(4) Health Aff. 903, 904-05 (2005).

FOR PROFIT ENTERPRISE IN HEALTH CARE 419

III. FOR-PROFIT HEALTH CARE

In the United States, healthcare is big business. The four major groups providing and supplying medical goods and services on a for-profit basis are physicians, for-profit and also not-for-profit hospitals, health insurers and health care manufacturers and suppliers. Of note, many hospitals and hospital chains are ostensibly not-for-profit but behave so like for-profit companies that some have questioned the appropriateness of their tax exempt status.105

The healthcare sector and its for-profit corporations do quite well in the U.S. economy. At Figure 3 is a chart listing the ranking of the healthcare industries among all industries in the United States.

Not surprisingly, there are multiple for-profit corporations engaged in the

business of health care. As for-profit companies, healthcare companies seek to maximize sales and increase profits for their products. These companies also provide jobs and exports that greatly benefit the economy of the United States. And the stock dividends and other capital instruments of these companies are a great source of wealth for the retirement plans of ordinary workers as well as a great source of wealth for the affluent.106

106 Glenn Greenwald, Healthcare industry stocks explode as bill progresses , SALON, Dec.

22, 2009, http://www.salon.com/news/opinion/glenn_greenwald/2009/12/22/health_care/index.html.

Figure 3 Top industries: Fast growers Growth in Profits (5 Years)

Industry Rank

Industry 2003 - 2008 % Annual Growth

in Profits

13 Medical Products and Equipment

15.6

16 Health Care: Pharmacy and Other

Services

13.4

19 Pharmaceuticals 12.1

20 Wholesalers: Health Care

11.7

23 Health Care: Insurance and Managed Care

8.8

30 Health Care: Medical Facilities

5.3

37 Insurance: Life, Health (stock)

-9.3

41 Insurance: Life, Health (mutual)

-18.3

420 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

A. The Players

The section below describes the financial characteristics of the major players in the healthcare sector. The noted characteristics pertain to their profitability. The following section, III.B, describes some of the more undesirable practices of these players with respect to maximizing revenue.

1. Physicians

Physicians are among the most highly paid workers in the nation. 107 As a recent Forbes Magazine article reports:

The medical profession continues to dominate the top end of our list of the 25 best- and worst-paying jobs in America. The top nine places are occupied by various sorts of medical specialists, with anesthesiologists topping the heap, followed by surgeons and orthodontists. . . . Chief executives, at No. 10, and airline pilots, at No. 11 (up three places from the previous year, despite what ails airlines), break the medical cartel, but only temporarily. The next five places are back in the well-scrubbed hands of doctors and dentists.108

However, it should be noted that, overall, physician income has declined in recent years. Specifically, between 1995 and 2003, average physician net income from the practice of medicine declined about 7 percent after adjusting for inflation, in part due to flattening reimbursement.109 In terms of keeping pace with inflation, primary care physicians and surgeons fared the worst, while medical specialists fared the best.110 Nevertheless, it should be noted that physicians in the United States are paid at generally much higher levels than in other countries in the Organization for Economic Co-Operation and Development (OECD).111

Increasingly, physicians are organized in larger group practices, including these for-profit corporations.112 Several for-profit medical groups are on the

107 Paul Maidment, America's Best- and Worst-Paying Jobs, FORBES, May 15, 2008,

http://www.forbes.com/2008/05/15/jobs-careers-compensation-lead-careers-cx_pm_0515jobs.html.

108 Id. 109 Ha T. Tu & Paul B. Ginsburg, Center for Studying Health System Change,

Losing Ground: Physician Income, 1995-2003, 1 (2006), available at http://www.hschange.org/CONTENT/851/851.pdf.

110 Id. 111 Rie Fujisawa & Gaetan Lafortune, The Remuneration of General Practitioners and

Specialists in 14 OECD Countries: What are the Factors Influencing Variations Across Countries? 7-8 (OECD Health Working Papers, No. 41, 2008), available at http://www.oecd.org/dataoecd/51/48/41925333.pdf; Written Statement from Mark Pearson, Organization for Economic Co-operation and Development, to Senate Special Committee on Aging: Disparities in Health Expenditure Across OECD Countries: Why Does the United States Spend So Much More Than Other Countries? (Sept. 30, 2009), available at http://www.oecdwash.org/PDFILES/Pearson_Testimony_30Sept2009.pdf.

112 See Ellyn Boukus et al., Center for Studying Health System Change, A Snapshot Of U.S. Physicians: Key Findings From The 2008 Health Tracking Physician Survey (2009), available at http://www.rwjf.org/files/research/hscbulletin35sept2009.pdf (table 2a provides information on physician compensation arrangements, specifically: income, method, availability of bonuses, and sources of practice revenue).

FOR PROFIT ENTERPRISE IN HEALTH CARE 421

Fortune 500 list of most profitable companies in the United States. Specifically, US Oncology Holdings, ranked 646th on the Fortune 500 in 2009,113 is the nation’s leading healthcare services network dedicated exclusively to cancer treatment. US Oncology is affiliated with over 1300 physicians practicing in approximately 490 locations, including 85 outpatient cancer centers in 39 states.114 Mednax (formerly Pediatrix Medical Group) is the largest provider of pediatricians for hospital-based neonatal intensive care units and one of the 100 fastest growing corporations in the nation. 115

In these for-profit medical groups, physicians are often required to sign non-compete clauses in their employment contracts.116 These clauses limit the employed physicians’ ability to leave the corporation and practice in the same or nearby community. These clauses have been criticized as unduly restraining competition in physicians’ services to the detriment of patients. 117 These factors influence for-profit medical groups to behave in a very entrepreneurial manner. There is considerable evidence that profit motives influence the way for-profit medical groups are organized and motivate physicians.118

2. Hospitals

The acute-care hospital sector in the United States is a mix of public, non-profit and for-profit hospitals. Specifically, according to the American Hospital Association, well over three-quarters of American hospitals operate as either not-for-profit or public corporations, and are thereby exempt from government taxation.119

In the first half of this decade, hospitals have done well financially and the sector has seen record revenues.120 More profitable hospitals have “shorter average lengths of stay, lower operating expenses per discharge and a higher case mix index.”121 Also, hospitals treating a greater proportion of patients with Medicare and private health insurance are comparably more profitable

113 CNN Money.com, Fortune 1000 - 2009,

http://money.cnn.com/magazines/fortune/fortune500/2009/full_list/601_700.html. 114 US Oncology, Company Background,

http://www.usoncology.com/portal/page/portal/PubWeb/1AboutUSON/05CompanyBackground (last visited Apr. 15, 2010).

115 David Rynecki et al., 100 Fastest-Growing Companies, FORTUNE, Sept. 1, 2003, http://money.cnn.com/magazines/fortune/fortune_archive/2003/09/01/348175/index.htm.

116 Eleanor D. Kinney, The Corporate Transformation of Medical Specialty Care: The Exemplary Case of Neonatology, 36 J. L. Med. & Ethics 790, 790-91 (2008).

117S. Elizabeth Wilbom Malloy, Physician Restrictive Covenants: The Neglect of Incumbent Patient Interests, 41 Wake Forest L. Rev. 189 (2006).

118 Kinney, supra note 116, at 790. 119 American Hospital Association, Fast Facts on US Hospitals,

http://www.aha.org/aha/resource-center/Statistics-and-Studies/fast-facts.html (last visited Apr. 15, 2010).

120 American Hospital Association, TrendWatch Chartbook 2009: Trends Affecting Hospitals and Health Systems, Chart 4.4: Annual Change in Hospital Operating Revenue and Expenses per Adjusted Admission, 1987 – 2007 (2009), available at http://www.aha.org/aha/trendwatch/chartbook/2009/chapter4.pdf; Melanie Evans, Will it last?; Hospital profits hit an all-time high in 2004, Modern Healthcare, Nov. 7, 2005, at 8.

121 Hospital Profitability, FACT FILE (Media Healthleaders), June 12, 2008, available at http://www.healthleadersmedia.com/content/FFL-213320/Hospital-Profitability.html.

422 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

than hospitals with a high volume of Medicaid patients or patients who were uninsured and subsidized by public tax relief and other funds.122

In 2008, the Wall Street Journal reported on the great profitability of not-for-profit hospitals and hospital systems:

Riding gains from investment portfolios and enjoying the pricing power that came from a decade of mergers, many nonprofit hospitals have seen earnings soar in recent years. The combined net income of the 50 largest nonprofit hospitals jumped nearly eight-fold to $4.27 billion between 2001 and 2006, according to a Wall Street Journal analysis of data from the American Hospital Directory. 123

More recently, hospitals have reported declining revenues. 124 One reason

for this decline is that both public and private health insurers are imposing cost restrictions on hospitals. For example, just recently, a major hospital chain, Continuum Health Partners, and United-Healthcare, one of the nation’s largest insurance companies, are engaged in a pitch battle over the control of treatment and costs at hospitals.125 The outcome of this struggle and the spread of such tactics to other hospitals and insurers could have broad ramifications for millions of people with private health insurance.

3. Health Insurers

Health insurers are comprised of commercial insurance companies, health maintenance organizations or Blue Cross Blue Shield plans. The latter plans are the largest group of health insurers enrolling more than 100 million Americans.126 The remaining Americans are insured primarily through employer self-insured plans.

Most insurance companies, including sponsors of Blue Cross Blue Shield plans, are for-profit corporations. Since the 1990s, when Blue Cross Blue Shield plans moved to become for-profit, the health insurance industry has become much more profitable than earlier decades. 127 Moreover, there has been considerable consolidation in the health insurance industry in the last

122 Bernard Friedman et al., New Evidence on Hospital Profitability by Payer Group and

the Effects of Payer Generosity, 4 Int’l J. Health Care Fin. & Econ. 231, 239 (2004). 123 John Carreyrou & Barbara Martinez, Nonprofit Hospitals, Once for the Poor, Strike it

Rich, Wall St. J., Apr. 4, 2008, available at http://online.wsj.com/article/SB120726201815287955.html?mod=googlenews_wsj.

124 Maggie Fox, U.S. Hospital Profits Fall to Zero, Thomson Reuters, Mar. 2, 2009,

available at http://www.reuters.com/article/idUSTRE5216G320090302. 125 Anemona Hartocollis, Insurer Steps Up Fight to Control Health Care Cost , NY Times,

Jan.24, 2010, available at http://www.nytimes.com/2010/01/25/health/policy/25insure.html. 126 Blue Cross Blue Shield Association, History of BCBSA: 2000s,

http://www.bcbs.com/about/history/2000s.html. 127 See generally Christopher. J. Conover et al., The Impact Of Blue Cross Conversions On

Health Spending And The Uninsured, 24(4) Health Aff. 473 (2005).

FOR PROFIT ENTERPRISE IN HEALTH CARE 423

decade, which led to the dominance of a few firms in each state insurance market and dramatic increases in premiums and profits for these firms. 128

Much debate has transpired over the profitability of health insurance during the recent health reform debate with rhetorical claims that insurers are making extraordinary profits at the expense of patients and providers. 129 The insurance industry maintains that only one cent of every dollar earned in its health insurance business goes to profit.130 In reality, health insurance is not particularly profitable when compared to other industries. 131 An article in the Wall Street Journal pointed out that WellPoint averaged a 5.8 percent return on equity over the past five years, Aetna averaged 4.2 percent, and although UnitedHealth was higher, at 9.6 percent, it fell to 6.4 percent in 2008. 132 4. Pharmaceutical, Medical Device and Medical Supply Companies

The pharmaceutical, medical device and medical supply industries are quite profitable. Between 1995 and 2002, pharmaceutical manufacturers were the most profitable industry in the US, ranking 3rd in 2003 and 2004, 5th in 2005, 2nd in 2006, and 3rd in 2007, with profits of 15.8 percent, compared to 5.7 percent for all Fortune 500 firms in 2007.133 Of the top 25 most profitable companies in the US economy in 2008, according to Fortune magazine, four are pharmaceutical companies. 134 When adjusted for the value of its research and development assets, the drug industry’s actual profitability is still somewhat higher than the average for all U.S. industries. 135 Medical device are likewise profitable,136 as are medical supply companies with five year gross margins of 59 percent, compared to 45.8 percent for the S&P 500.137

128U.S. Gov't Accountability Office, GAO-09-864R, Competition in Health

Insurance Markets (2009); James C. Robinson, Consolidation and the Transformation of Competition in Health in Health Insurance, 23(6) Health Aff. 11 (2004).

129 Jeff Jacoby, Editorial, Hyperbole in the Health Care Debate, Boston GlobE, Nov. 1, 2009.

130 Joanne Silberner, Are Insurers’ Profits as Low as They Claim?, Nat’l Pub. Radio, Aug. 3, 2009, http://www.npr.org/templates/story/story.php?storyId=111494182.

131 Ezra Klein, Economic and Domestic Policy and Lots of it Blog, Profit and the Insurance Industry, Wash. Post, http://voices.washingtonpost.com/ezra-klein/2009/09/profit_and_the_insurance_indus.html (Sept. 9, 2009, 4:46 PM); Calvin Woodward, Fact Check: Health Insurer Profits Not So Fat, Associated Press Fin. Wire, Oct. 25, 2009, available at http://abcnews.go.com/Business/wireStory?id=8910507; Calvin Woodward, available at Fact Check: Health Insurers’ Profits 35th of 53, ASSOCIATED PRESS FIN. WIRE, Oct. 26, 2009, available at http://abcnews.go.com/Business/wireStory?id=8914676.

132 Brett Arends, Will a Public Option Hurt Insurance Company Profits?, Wall St. J., Aug. 5, 2009, available at http://online.wsj.com/article/SB124947013703607453.html.

133 Kaiser Family Found., Prescription Drug Trends (2008). 134 Top Companies: Most Profitable (2008), CNNMoney.com, May 4, 2009,

http://money.cnn.com/magazines/fortune/fortune500/2009/performers/companies/profits/. 135 Congressional Budget Office, Research And Development In The

Pharmaceutical Industry 4 (2006). 136 Jon Kamp, US Medical-Device Firms Shed Issues in 2010, But Gain Others , DOW

JONES NEWSWIRES, Dec. 29, 2009. 137 Julie Appleby, Kaiser Family Found., Proposed Tax Rattles Orthopedic Device

Industry, Kaiser Health News, Oct. 14, 2009, http://www.kaiserhealthnews.org/Stories/2009/October/14/Medical-device-tax.aspx (noting that medical equipment and suppliers as a whole showed five-year gross margins of 59%, compared with 45.8% for the S&P 500).

424 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

The profits of pharmaceutical companies have been particularly controversial, especially since Congress enacted the Medicare prescription drug benefit in 2003.138 The issue with respect to pharmaceutical profits is the impact of the pharmaceutical business on the economy. The pharmaceutical industry is one of the top performing industries in terms of return on revenues (average 18.6 percent) and return on assets (average 17.7 percent), as compared to 4.9 percent and 3.9 percent respectively for median Fortune 500 companies in other industries.139 The net profit margins for the U.S. medical device sector ranges from 7 to 10 percent for basic items (e.g., hospital beds), to more than 20 percent for artificial joints and other high-end technologies.140

B. Undesirable Profit Maximizing Practices

All types of enterprise in healthcare, regardless of type of corporate control, engage in practices to maximize revenues and profits. Such conduct is expected, and, in fact, commendable and highly desirable. Entities need to be profitable if they are to maintain their vital role as employers, dividends payers, exporters, philanthropists and taxpayers.

However, some practices have emerged among these major players that are designed to maximize profit, but which are highly detrimental to patients. These practices belie the non-profit a even eleemosynary missions of some entities. For all entities, they raise serious issues of professional and/or business ethics at the very least. The practices of greatest concern are: (1) the ordering of unnecessary healthcare goods and services by physicians; (2) non-transparent and uncharitable practices of hospitals; (3) rescission, post-claims underwriting and aggressive underwriting practices of insurers; (4) pricing and other business practices of pharmaceutical and medical device companies.

1. The Ordering of Unnecessary Healthcare Goods and Services by Physicians

Substantial evidence exists that providers are providing too many unnecessary services and goods for their patients. Much of the blame for this excess lies with physicians who must certify, under most public and private health insurance plans, that services are reasonable and necessary for the patient’s diagnosis and treatment. Perhaps the most persuasive evidence of the provision of unnecessary services is the widespread variation in rates of utilization in the same healthcare services in different parts of the country for no apparent reason.141 A recent and influential article in the New Yorker

138 See F. M. Scherer, The Pharmaceutical Industry – Prices and Progress, 351 NEW ENG.

J. MED. 927 (2004). 139 Michael O. Adams & Gbolahan S. Osho, Drugs Company Profits In The United States:

Are They Excessive? Evidence From Public Administration Perspectives , 4 J. Bus. & Econ. Res. 85, 85-86 (2006).

140 Dan Eggen & Ceci Connolly, Medical Device Makers Court Unlikely Allies: Pro Reform Democrats Defend Home State Firms, Wash. Post., Oct. 18, 2009, at A01, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/10/17/AR2009101700718.html .

141 See supra notes 100-101 and accompanying text.

FOR PROFIT ENTERPRISE IN HEALTH CARE 425

Magazine reported data and analysis from the Dartmouth Atlas Project.142 This article demonstrated that physicians and hospitals in McAllen, Texas, provided substantially more medical goods and services to Medicare patients than providers in surrounding communities, with little explanation for the difference:

Between 2001 and 2005, critically ill Medicare patients received almost fifty per cent more specialist visits in McAllen than in El Paso, and were two-thirds more likely to see ten or more specialists in a six-month period. In 2005 and 2006, patients in McAllen received twenty per cent more abdominal ultrasounds, thirty per cent more bone-density studies, sixty per cent more stress tests with echocardiography, two hundred per cent more nerve-conduction studies to diagnose carpal-tunnel syndrome, and five hundred and fifty per cent more urine-flow studies to diagnose prostate troubles. They received one-fifth to two-thirds more gallbladder operations, knee replacements, breast biopsies, and bladder scopes. They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen’s extreme costs was, very simply, the across-the-board overuse of medicine. 143 These differences in utilization suggest a spirit of excessive

entrepreneurialism on the part of many physicians. Such entrepreneurialism is appropriate and commendable in a failed market, and at the expenses of public subsidies for public health insurance programs and tax expenditures for much private health insurance.

2. Non-Transparent and Uncharitable Practices of Hospitals

A very undesirable practice of hospitals is the non-transparent billing for medical goods and services. The billing process is complex. The basic document for hospital billing is the so-called chargemaster that contains the charges that the hospital establishes for all procedures and supplies. Hospitals have considerable discretion in setting the charges and it is well known that the charges on the chargemaster are far greater than the cost of the supplies and procedures.144

In the great majority of cases, the hospital obtains information about the patient and locates it on the uniform bill. The bill includes the following specific information: (1) the provider; (2) the patient visit/insured; (3) charges for specific goods and services; (4) the insurance payer; and (5) diagnoses and procedures.145 The payments from Medicare and many other payers is based on the codes assigned to diagnoses and procedures, and

142Atul Gawande, The Cost Conundrum: What a Texas Town can Teach us about Health

Care, New Yorker, June 1, 2009, http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande?currentPage=all

143Id. 144 Ewe E. Reinhardt, The Pricing of U.S. Hospital Services: Chaos Behind A Veil of

Secrecy, 25(1) Health Aff. 57 (2006). 145 Claudia Birkenshaw, Handbook for Hospital Billing 50-57 (2009).

426 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

submitted electronically. Generally the payer will determine the payment pursuant to a formula established by law for public programs and by contract with private programs.146

Because insurers insist upon and can obtain deep discounts in return for providing large numbers of insured patients, hospitals set charges in the chargemaster, at a very high level so that they can recoup sufficient revenue from insurers.147 Then, for insured patients, bills are “discounted” pursuant to non-transparent methods negotiated with different third party payers. Of note, the American Hospital Association reported that in 2004, insurers and patients paid U.S. hospitals only about 38 percent of their charges.148

For the balance not paid by private insurance, hospitals may bill beneficiaries. They cannot so bill recipients of Medicare and Medicaid. 149 The bill is comprised of an itemized list of charges (based on the chargemaster) for specific goods and services that were provided the patient during the hospital stay.150 These bills can be substantial. Also of concern is that uninsured patients are charged at levels near the chargemaster charges, which insurers almost never pay.151 The bills to patients are often inaccurate as well.152

Hospitals have also engaged in aggressive collection tactics to recover patient debt. More and more hospitals are putting debt up for auction and thereby incentivizing the purchasers of the debt to be more aggressive in collection activities.153 The American Hospital Association has developed guidelines for hospital billing and debt collection practices. 154 Many states have enacted legislation to protect consumers in the face of hospital debt. 155 These state laws generally require hospitals to give individuals the same reductions from the price that they give insurance companies, prohibit harassing collection efforts and working with patients to resolve debt issues.

146 Id. at 317-71. 147 Reinhardt, supra note 144. 148 American Hospital Association, Hospital Statistics 2005, at Table 3 (2005);

Reinhardt, supra note 144, at 57. 149 42 U.S.C. § 1395f (2006) (Medicare); 42 U.S.C. § 1396 a(14) & 1396o (2006)

(Medicaid). 150 Birkenshaw, supra note 145, at 402-03. 151 Gerald F. Anderson, From 'Soak The Rich' To 'Soak The Poor': Recent Trends In

Hospital Pricing, 26(3) Health Aff. 780 (2007); Margaret K. Kyle and David B. Ridley, Would Greater Transparency and Uniformity of Health Care Prices Benefit Poor Patients? , 26(5) Health Aff. 1384 (2007); Glenn A. Melnick & Katya Fonkych, Hospital Pricing And The Uninsured: Do The Uninsured Pay Higher Prices?, 27(2) Health Aff. w116 (2008).

152 Peter Davidson, The Basics: 10 ways to avoid outrageous hospital overcharges, Moneycentral.msn.com, http://moneycentral.msn.com/content/Insurance/Insureyourhealth/P74840.asp (last visited Apr. 15, 2010).

153 Sarah Rubinstein, Hospitals Put Patients' Debt Up for Auction Collection Agencies Bid Online For Right to Recoup Funds; Worries About Tougher Tactics, Wall St. J., June 3, 2008, available at http://online.wsj.com/public/article/SB121244901525139563-KNO1CygwzzD0IGqMG8IfVp8_z80_20090603.html?mod=rss_free.

154 American Hospital Association, Hospital Billing and Collection Practices Statement of Principles and Guidelines, available at http://www.accessproject.org/adobe/AHA_hospital_billing_and_collection_practices.pdf.

155 A Pound of Flesh: Hospital Billing, Debt Collection, and Patients’ Right s, ISSUE BRIEF (Families, USA), Mar. 2007, available at http://www.familiesusa.org/assets/pdfs/medical-debt.PDF.

FOR PROFIT ENTERPRISE IN HEALTH CARE 427

Some evidence suggests that patients and their advocates are concerned about these practices and fighting back.156 There have been at least 40 class action lawsuits against more than 400 not-for-profit hospitals nationwide, challenging the hospitals' charity care policies and billing practices toward uninsured patients.157

In response to these trends, the Internal Revenue Service published a report on nonprofit hospitals that focused on their benefit to the community, which justifies their tax exempt status and executive compensation. 158 Uncompensated care was the largest reported community benefit expenditure for nearly all hospitals, irrespective of their geographic or annual revenue grouping.159 After uncompensated care, the next largest categories of community benefit expenditures, ranked as a percentage of total community benefit expenditures, were medical education and training (23 percent), research (15 percent), and community programs (6 percent). 160 Of interest, in March 2010, the Supreme Court of Illinois ruled that Provena Covenant Medical Center in Urbana, Illinois had not demonstrated that it provided sufficient charity care to justify the state property tax exemption. 161

3. Post-Claims Underwriting and Aggressive Underwriting Practices of Insurers

Very disconcerting practices of health insurers in the individual insurance market are rescission and post-claims underwriting that insurers invoke when patients incur substantial medical bills and allegedly have filed fraudulent applications for coverage. In June, 2009, the Energy and Commerce Committee of the House of Representatives held a hearing on termination of individual health insurance policies.162 The hearing reported on health insurers’ practices of rescission and post-claims underwriting. The hearing picked up on numerous reports from around the country of these practices and their devastating consequences for sick people.163 The committee’s

156 See, e.g., Hospitaldebtjustice.org, About the Hospital Debt Justice Project,

http://www.hospitaldebtjustice.org/about.html (last visited Apr. 15, 2010); The Kaiser Family Found., Kaiser State Watch | Baltimore Sun Series Examines Debt Collection Practices of Maryland Hospitals, Kaisenetwork.org, Dec. 23, 2008, available at http://www.kaisernetwork.org/Daily_Reports/rep_index.cfm?DR_ID=56225.

157 Andrew McKinley, Hospital Billing Practices and the Uninsured: An Emerging Legislative Response, Health Care Fin. Mgmt. Ass’n, Nov. 2004, available at http://findarticles.com/p/articles/mi_m3257/is_11_58/ai_n6359492/ .

158 Internal Revenue Service, IRS Exempt Organizations (TE/GE) Hospital Compliance Project: Final Report (2009), available at http://www.irs.gov/charities/charitable/article/0,,id=203109,00.html.

159 Id. 160 Id. 161 Provena Covenant Med. Ctr. v. Dep’t. of Revenue, 2010 WL 966858 (Ill. 2010), aff’g,

384 Ill.App.3d 734, 894 N.E.2d 452 (2009). See also Utah County v. Intermountain Health Care, Inc., 709 P.2d 265, 269 (Utah 1985).

162 Terminations of Individual Health Policies by Insurance Companies: Hearing Before the H. Comm. on Energy and Commerce, Subcomm. on Oversight and Investigations, 111th Cong. (2009) [hereinafter Hearing on Health Policies].

163 See, e.g., Karl Vick, When Your Insurer Says You're No Longer Covered: Firms Defend 'Rescissions' as Fraud Control, Wash. Post, Sept. 8, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/09/07/AR2009090702455.html; Cancer Patient Tells of Rips in

428 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

investigation revealed that in the previous five years, almost 20,000 individual insurance policyholders have had their policies rescinded by the three insurance companies who testified at the hearing -- Assurant, UnitedHealth Group, and WellPoint.164 The committee identified the following abuses:

• Conducting investigations with an eye toward rescission in every case in which a policyholder submits a claim relating to leukemia, breast cancer, or any of a list of 1,400 serious or costly medical conditions;

• Rescinding policies based on an alleged failure to disclose a health condition entirely unrelated to the policyholder’s current medical problem;

• Rescinding policies based on policyholders’ failure to disclose a medical condition that their doctors never told them about;

• Rescinding policies based on innocent mistakes by policyholders in their applications; and

• Rescinding coverage for all members of a family based on a failure to disclose a medical condition of one family member.165

4. Business Practices of Pharmaceutical and Medical Device Company

Pharmaceutical and medical device companies are very profitable and engage in very entrepreneurial business practices. Also, pharmaceutical companies engage in pricing practices that result in prices being far higher in the United States than they are in other industrialized countries. 166 Clearly, the pricing practices of pharmaceutical and medical device companies warrant further examination. However, a thorough examination of these practices, which necessarily require consideration of a host of international and economic issues, is simply beyond the scope of this particular article.

IV. CONTROLING COSTS IN A FOR-PROFIT HEALTH CARE SECTOR

If no reform is enacted, health sector costs will continue to escalate to alarming levels, threatening access to health insurance and care. Also, under current law and without reform, the average number of non-elderly people (those younger than 65) who are uninsured will rise from at least 45 million in 2009 to about 54 million in 2019.167

Yet real reform is not possible if for-profit enterprise does not participate in bending the cost curve. The basic challenge of so-called “bending the cost curve” in healthcare is the recognition that doing business as usual in a for-profit business where the incentives are to increase the consumption of goods and services is bad for healthcare. However, the current reality is that healthcare products and services are delivered and paid for in the context of

Health Insurance Safety Net , CNNPolitics.com, Jun. 16, 2009, http://edition.cnn.com/2009/POLITICS/06/16/health.care.hearing/index.html.

164 Hearing on Health Politics, supra note 6 (opening Statement, Rep. Bart Stupak, Chairman, Subcommittee on Oversight and Investigations).

165 Id. 166 Organization for Economic Co-Operation and Development, Pharmaceutical Pricing

Policy Project, http://www.oecd.org/document/57/0,3343,en_2649_37407_35715449_1_1_1_1,00.html (last visited May 7, 2010).

167 Id.

FOR PROFIT ENTERPRISE IN HEALTH CARE 429

colossal market failure. As noted above, over 15 percent of the U.S. population has no health insurance and even more have inadequate health insurance.168 This fact alone demonstrates that the current market for health insurance coverage is unable to provide an affordable product for much of the population.

In 2008, the percentage of people covered by government health insurance programs increased to 29 percent, from 27.8 percent in 2007. 169 Expenditures from public programs in 2007 were $760.6 billion and accounted for 33.9 percent of health care expenditures. 170 Private third-party payers paid $775 billion, which accounted for 34.6 percent of health care expenditures.171 Further, poor economic conditions over the last year are placing greater burdens on public health insurance programs while private coverage declines. 172

Finally, the Internal Revenue Code authorizes tax deductions for employer contributions to employee welfare benefits plans, including health insurance plans.173 This preferential tax expenditure translated into a $246.l billion federal contribution to employer-sponsored health insurance in 2007.174

Under prevailing economic principles, public subsidies and not-for-profit business organizations are techniques to adjust for market failures to ensure that goods and services of perceived essential value are available to the public at a reasonable price, or even for free. Such extraordinary steps are justified because the goods and/or services provided in the failed market are of perceived essential value and must be available to all. Commerce in healthcare does not operate as a free market in which for-profit firms compete for quality and prices in a competitive market and are able to provide high quality, affordable products without public subsidies. In highly subsidized markets in essential goods, it is unseemly that businesses should be able to raise extraordinary profits at basically public expense.

It is beyond the scope of this article to specify reforms to address these deficiencies in great detail. Nevertheless, some reforms of current law seem worth exploring. While not addressed specifically in this article, states and the federal government should explore the use of practices that are prevalent in commercial markets, such as non-compete clauses in employment contracts, and evaluate their appropriateness for the healthcare sector in the face of market failure. Federal policy makers should also revisit federal

168 Income, supra note 6, at 19-22. 169 U.S. CensusBureau, Health Insurance Coverage: 2008 - Highlights,

http://www.census.gov/hhes/www/hlthins/hlthin08/hlth08asc.html (last visited Apr. 15, 2010).

170 Ctrs. for Medicare & Medicaid Servs., Office of the Actuary, National Health Expenditure Projections 2008-2018, at 3-5, available at www.cms.hhs.gov/nationalhealthexpenddata/downloads/proj2008.pdf.

171 Id. 172 Id. 173 I.R.C. § 162 (2006). 174 Joint Comm. on Taxation, Tax Expenditures for Health Care 2, 4 (2008),

available at http://www.jct.gov/publications.html?func=startdown&id=1193.

430 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

antitrust orthodoxy when it comes to healthcare and see if current antitrust rules address the dysfunctional healthcare market. 175

A. Health Reform as a Solution

On March 23, 2010, President Barak Obama signed the Patient Protection and Affordable Care Act (PPACA) enacting health reform in the United States.176 On March 30, 2010, President Obama signed the Health Care and Education Reconciliation Act of 2010 which amended and completed the PPACA health reform legislation.177

PPACA as amended mandates most people to have health insurance, with premium and cost-sharing credits available to individuals and/or families with incomes between 100 percent and 400 percent of the federal poverty level.178 To enhance access to health coverage, PPACA would create state-based American Health Benefit Exchanges through which individuals can purchase coverage.179

Regarding employers, the law would exempt certain employers. The law would create separate Exchanges through which small businesses can purchase coverage.180 The law would also require employers, except small ones, to pay penalties for employees who receive tax credits for health insurance through an Exchange.181

The law would impose reforms for insurance plans that are eligible to participate in the exchanges.182 Reforms include mitigation of preexisting condition provisions in health insurance policies and other reforms that guarantee availability of insurance in the event of serious illness. Among such reforms will be sharp limits on the ability of insurers to rescind policies after issue when insureds incur serious illness or injury.

Finally, the law expands Medicaid to cover all the poor, and would cover individuals up to 133 percent of the federal poverty level. 183 The law also makes improvements and expansions in the Medicare program. 184 The law

175 Martin Gaynor & Deborah Haas-Wilson, Change, Consolidation, and Competition in

Health Care Markets, 13(1) J. of Econ. Persp. 141 (1999);Thomas L. Greaney, Whither Antitrust? The Uncertain Future of Competition Law in Health Care, 21(2) Health Aff. 185 (2000).

176 Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111-48, 124 Stat. 119-1025 (2010).

177 Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-52, 124 Stat. 1029-84 (2010).

178 PPACA §§ 1401-02. See Kaiser Family Foundation, Focus on Health Reform: Summary of New Health Reform Law 1, 2 (2010), available at http://www.kff.org/healthreform/upload/8061.pdf [Hereinafter Summary of New Health Reform Law].

179 PPACA § 1311. See Summary of New Health Reform Law, supra note 178, at 4-6. 180 PPACA §§ 1311-24, 1515. See Summary of New Health Reform Law, supra note

178, at 4. 181 PPACA §§ 1311-24, 1515. See Summary of New Health Reform Law, supra note

178, at 1. 182 PPACA §§ 1201-2708. See Summary of New Health Reform Law, supra note 178,

at 6-7 183 PPACA §§ 2001-202. See Summary of New Health Reform Law, supra note 178, at

7. 184 PPACA §§ 3101-602. See Summary of New Health Reform Law, supra note 178, at

8.

FOR PROFIT ENTERPRISE IN HEALTH CARE 431

also includes several strategies and initiatives to improve the delivery of medical care and make it more efficient and effective.185

A critical issue in the debate was the degree to which these reforms would constrain cost and impact the deficit. CBO released its final cost estimates for Reconciliation Act of 2010, which included estimates for PPACA, on March 20, 2010,186 “CBO and the staff of the Joint Committee on Taxation (JCT) estimate that enacting both pieces of legislation will produce a net reduction in federal deficits of $143 billion over the 2010-2019 period. About $124 billion of that savings stems from provisions dealing with health care and federal revenues; the other $19 billion results from the education provisions . . . . CBO and JCT estimate that by 2019, the two pieces of legislation combined will reduce the number of nonelderly people who are uninsured by about 32 million, leaving about 23 million nonelderly residents uninsured.” 187 The CBO, as does Congress, intends for health reform legislation to accomplish reductions in the trajectory of healthcare expenditures in order to make health reform and coverage expansion affordable. The issue is whether that political will is possible when the four major players in the health industry have so much money at stake.

B. Steps for Reform

Evidence abounds that the profit motive has a role in generating healthcare costs. Insurance companies seeking profits will endeavor to cover people who are unlikely to get sick. Physicians and providers will, without payment regulation, endeavor to provide the highest volume of service they can possibly can for the highest price.

185 PPACA §§ 3001-27. See Summary of New Health Reform Law, supra note 178, at

9-10. 186 Congressional Budget Office, Health Care: Cost Estimates for Health Care,

http://www.cbo.gov/publications/collections/health.cfm (visited May 5, 2010). 187 Id.

432 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

There is much evidence that all players in the healthcare sector will and

do respond to payer policies aimed at reducing costs. At Figure 4is a vignette of the interaction of an imaging machine manufacturer, physicians, as well an HMO and the Medicare program. This vignette demonstrates that individual providers and suppliers will respond to incentives to generate revenues without public policy concerns. In this vignette, regulatory controls were imposed to reduce price and utilization. The information that is not reported in this vignette is how patients were affected by the reduction in imaging services. Arguably physicians had less information on which to make clinical decisions. The key issue is whether they had sufficient information.

188 David Whelan, Cranking Up the Volume: One Reason Medical Costs Are Getting Way

Out of Control: GE Employs Too Many Good Salesmen , Forbes, Feb. 25, 2008, http://www.forbes.com/forbes/2008/0225/032.html.

Figure 4 David Whelan, Cranking Up the Volume: One

Reason Medical Costs Are Getting Way Out of Control: GE Employs Too Many Good Salesmen, Forbes (Feb. 25, 2008).188

“Radiologist David Gruen used to spend millions of dollars to replace his General Electric MRI and CT scanners every three years. It was money well spent because the machines were always busy. But a year ago Medicare cut the price it pays for imaging, so Gruen gets paid 15% to 50% less for each order, depending on the type of scan. Health insurers got wise, too, and started imposing a 48-hour review on imaging orders. The doctor hired clerks to battle the HMOs, but his office volume was flat last year, down from 10% growth in prior years. Gruen was forced to take a 20% salary cut. Now his Norwalk, Conn. practice is holding off on buying new machines and stretching the old machines' life span to five years. ‘We really do face a crisis,’ he says.

Our sympathies. But what's bad for the radiologist and all the big companies selling him new equipment--General Electric, Siemens and Philips--is good for everyone who foots the bill. Imaging accounts for only 5% of the $2 trillion in U.S. medical spending, but it has been the fastest-growing component of health care inflation in recent years, climbing 20% annually until last year. Scans (excluding old-fashioned X rays) per thousand insured people went from 85 to 234 in the U.S. since 1999 . . . Consumers demanded scans whenever they ached, and doctors went along, sometimes out of fear of lawsuits. Expensive fact: Pittsburgh has more MRI machines than Canada.”

* * *

FOR PROFIT ENTERPRISE IN HEALTH CARE 433

1. Physicians

Much can be done to reorganize medical practice to make it more efficient. One strategies is to enhance access to primary care professionals in medical homes. The evidence is overwhelming that people who have an effective primary care physician get better care, and this reality has been widely recognized; and most health reform proposals endeavor to strengthen primary care, and so-called medical homes in particular.189 The Commonwealth Fund has an important proposal which suggests how such reforms could be financed efficiently,190 as has the American College of Physicians.191

Further, do not automatically reject physician-sponsored initiatives which enable primary care physicians to practice in the manner they feel is most effective for good clinical care, and tap patient resources to do so.192 For example, many physician practices have engaged in so-called “concierge” medicine that provides services and perks for a flat annual fee over and above insurance. Of note, the Medicare program has not rejected these arrangements for Medicare patients out of hand.193 If done well, such approaches could address funding issues with primary care physicians and enable them to provide better service to their patients.

What is needed is a revision of the entrepreneurial spirit in medicine that encourages some doctors to order unnecessary goods and services. Physicians argue that they are forced to order these goods and services out of fear of medical liability.194 Some evidence suggests that the claims about the problem of medical malpractice and the impact of defensive medicine on medical costs are overblown.195 Nevertheless, because the issue of malpractice

189 See, e.g., Neil Kirschner & Michael S. Barr, Specialists/Subspecialists and the Patient-

Centered Medical Home, 137 CHEST 200 (2010); P. A. Nutting et al., Initial Lessons From the First National Demonstration Project on Practice Transformation to a Patient-Centered Medical Home, 7(3) Annals Fam. Med. 254 (2009).

190 See Anne C. Beal et al., The Commonwealth Fund, Closing the Divide: How Medical Homes Promote Equity in Health Care (2007), available at http://www.wafp.org/documents/ClosingtheDivide.pdf.

191 Jack Ginsberg, Am. Coll. of Physicians, Controlling Health Care Costs While Promoting The Best Possible Health Outcomes (2009), available at http://www.acponline.org/advocacy/where_we_stand/policy/controlling_healthcare_costs.pdf.

192 See Vasilios J. Kalogredis, Should You Consider Concierge Medicine?, PHYSICIAN’S NEWS

DIGEST, Feb. 2004, http://www.physiciansnews.com/business/204.kalogredis.html; Is A "Concierge" Medical Practice for You?, The Entrepreneurial MD, Mar. 1, 2007, http://www.entrepreneurialmd.com/index/2007/3/1/is-a-concierge-medical-practice-for-you.html.

193 U.S. Government Accountability Office, Physician Services, GAO-05-920, Concierge Care: Characteristics and Considerations for Medicare (2008).

194 Daniel P. Kessler & Mark B. McClellan, Do Doctors Practice Defensive Medicine?, 111 Q. J. ECON. 353 (1997); Daniel P. Kessler & Mark B. McClellan, The Effects of Malpractice Pressure and Liability Reforms on Physicians’ Perception of Medical Care, 60 Law & Contemp. Probs. 81 (1997); Daniel P. Kessler & Mark B. McClellan, How liability law affects medical productivity, 21(6) J. Health Econ. 932 (2002).

195 Office of Tech. Assessment, 103rd Cong., Defensive Medicine and Medical Malpractice (1994); Patricia M. Danzon, Liability for Medical Malpractice, in 1B Handbook of Health Economics 1339, 1339-1404 (Anthony J. Culyer & Joseph P. Newhouse eds., 2000); Henry J. Aaron & Paul B. Ginsburg, Is Health Spending Excessive? If So, What Can We Do About It?, 28(5) Health Aff. 1260, 1270 (2009).

434 AMERICAN JOURNAL OF LAW & MEDICINE VOL. 36 NO. 2&3 2010

so clearly animates the medical profession and other providers, it might be worthwhile to adjust the medical malpractice system to give physicians the confidence that they can cut back on the goods and services they order.

2. Hospitals

Hospitals desperately need to make their billing practices more transparent and humane, especially when it comes to the uninsured and the underinsured (a growing group). Hospitals already recognize that their charges do not correspond to the cost of doing business, given that they give public and private health insurance programs deep discounts for the services they provide their enrollees. They should develop comprehensible billing practices based on real costs that allow for transparent displays of the charges for goods and services. They should also cease from aggressive billing practices, particularly if they operate in the not-for-profit corporate form. Also, not-for-profit hospitals need to develop debt forgiveness policies that appreciate the fact that most people in the United States, except the very well off, are able to afford hospital care at today’s charges.

Also, reform should hold the fire to hospitals when it comes to the community benefit that justifies their federal tax relief. A 2008 report of the Government Accountability Office addressing valuation issues for the hospital community benefit would be an excellent place to start.196 Community benefits must represent real benefit. Benefit should be measured as whether the community benefit is worth the local, state and federal tax expenditures, or, better yet, given to patients in the form of lower charges. More generous debt forgiveness programs might be a start in this direction. Community health fairs are not.

3. Health Insurers

Health reform legislation is based on the premise that, with tighter regulation of the health insurance market and mandated universal coverage, for-profit health insurance companies will be able to provide affordable health insurance to the non-elderly, working population. Health insurers have a tremendous opportunity to participate in a reform that enhances access to healthcare for many people. They also have a tremendous opportunity to show that for-profit enterprise can meet important social welfare needs with regulatory coordination and support.

Recent evidence notwithstanding,197 health insurers should proceed carefully in raising premiums and taking adverse actions against insureds. While such actions may be justified in some instances, the justification must be fundamentally comprehensible to a wide majority of people for its acceptance. Enhancing profitability alone is arguably not a justification for such actions, although preventing losses might be.

196 General Accountability Office, GAO 08-880, Nonprofit Hospitals: Variation

in Standards and Guidance Limits Comparison of How Hospitals Meet Community Benefit Requirements (2008), available at http://www.gao.gov/new.items/d08880.pdf.

197Robert Pear, Health Executive Defends Premiums, NY Times, Feb. 24, 2010, available at http://www.nytimes.com/2010/02/25/health/policy/25health.html.

FOR PROFIT ENTERPRISE IN HEALTH CARE 435

Health reform legislation should explicitly address the practices of rescission and post-claim underwriting for individual health insurance contracts. Possible reforms would be the imposition of time limits on which insurers could rescind health insurance contracts. Other possible reforms include a higher evidentiary standard for intentional misrepresentation, and mandated external review of decisions to rescind. Another reform would be to prohibit the practice of post-claims underwriting altogether, or after a very brief time period of less than one year.

4. Pharmaceutical Products

As indicated above, pharmaceutical and medical device products are more costly in the United States than in other peer countries in the Organization for Economic Co-Operation and Development (OECD).198 Unpacking the reasons for this difference is essential if costs of medical products are going to be affordable in the United States.

V. CONCLUSION

There is much evidence of dysfunctional business practices by all players in the healthcare sector and that these practices do much to derail a functioning market for healthcare goods and services. Under no circumstances should an economic sector so heavily subsidized by public funds be allowed to become a “cash cow” for entrepreneurs who are unable to provide high quality goods and services at an affordable rate in a competitive market.

198 Organization for Economic Co-Operation and Development, supra note 166.